Channel trading, trend trading, and the importance of never trading based on one factor

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Diversified Trend Trading Approach

Warning. he or she that dares to enter this thread will be sent on a perilous journey into science and the mind. This is a journal of trend followers. A strange divergent species that exist in the trading world who think to much, luv the scientific method, listen to too much music and like the sound of their own voices. Enter with care. You have been warned.

To get the ball rolling. this video is mandatory.

Update – 2020 Resolution – A Change of Direction into the Land of Fun

Ok guys. The New Year brings a few changes to the direction of this thread. I would prefer to see this thread become much more of a discussion thread regarding all things trendy (divergent) and diversified. The gloves are now off and we can create a bit of chaos here. so let’s see if we can raise the tempo with participation and make this less of a one way diatribe from a few die-hard trend followers.

Over the 2020 year I will be winding down my efforts a bit on this thread and increasing the sporadic brain farts and anything that catches my eye that might be a bit relevant to the general topic of diversified trend following. I would prefer that this thread remains active and is not relegated to the archives from a general lack of participation.

The only rule that we should abide by is a general respect for all participants here and the need to keep things positive and fun. Of course fun posts of general nonsense will be encouraged as well as mandatory music inclusions. Let’s turn this into a fun place as opposed to a public library :-)

. and the best for the New Year to all of you.

Below is the original intro to this thread. but things have moved on considerably in this thread’s evolution from it’s original intent.

I have been a lurker on this forum for quite a while and have been looking at the pro’s and con’s of sharing my trading approach with everyone here. Bottom line is that I wish to collaborate with the community as I have seen some very worthwhile contributions in some of the threads I have visited, particularly those from the trend following camp who have spared the time to spread the jubilation that sustainable trading for a living can bring.

I am particularly excited with the robustness of the strategy referred to as the Diversified Trend Trading Approach or DTT, as I have been involved in trading for the better part of my life both in the operation of a small fund and in areas of compliance relating to fund management and have seen and experienced first hand a lot of false hopes. Experience has taught me to avoid Martingale’s no matter how they are hedged (I was a past Martingale addict and once you are one, it is incredibly hard to pull yourself out) and I also avoid aggressive pyramiding into trades. On Martingales, the key is a regular harvest and the need to ensure you only allocate a small percentage of your trade capital towards them, as you just never know when or even if that day will arrive, no matter how clever you structure your progression. The market has this unnerving ability to sniff out the weaknesses in your creation.

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If I was asked, what are the merits of this approach and why does this strategy deserve any attention, then the simple response is this. and trend traders have all heard it before. A single instrument may experience only a small number of significant trends over a defined extended period. On a D1 chart, maybe as little as 2-4 times a year. A trend trader wants to be on these trends as this is his/her bread and butter. but they also want to avoid or minimise false starts . so to increase your probability win rate, you need to focus on confirmed trends of substance, and keep control of your trigger finger. and if your living is dependent on your approach, you want to control your behaviour to prevent overtrading as soon as you sniff a trend.To improve trade probabilities, reduce lumpy cashflow and diversify risk, you also need to keep watch over a large number of diversified instruments so you can afford to be selective in only choosing those trades that ‘scream out to you for action’. and you want to strictly control your risk to keep you in the game, pay those bills and keep your family happy. This approach seeks to address these important issues faced by a trend trader.

Warning. Ifyou are new to the game of trend trading then I strongly suggest you spend considerable time backtesting, forward testing, trialling a demo account on a single instrument before you launch into multiple instrument trading..and before you even think of going live..not that multiple instruments pose any significant different nuances. but rather that it is essential to understand how to trade trends first before you attempt to diversify. Managing multiple instruments is only going to compound your problems if you are not fluent at trading trends on a single instrument. Your hands will be flying everywhere, your screens will bear witness to grimaces of pain and torture. and your pets will be steering clear of you. This thread should not put you off participation but I strongly advise that you do the hard yards and earn your certificate first. for you could very well be swearing at me in later posts. and I can always refer you back to this original section of the first post, without having to say I told you so directly.

Note regarding the use of correlation and trend strength measures as filters for the strategy. Despite the power of these tools for trend trading strategies in general, I tend to disregard these filters as their inclusion significantly reduces the number of available trades. I recognise the importance of these measures if trading a narrow range of instruments, but given the diversified nature of this strategy, my backtest concludes that they are not necessary. at the moment but may alter in the future as this strategy is honed (as discussed later). What is the critical determinant as a filter for this strategy is whether or not a trend exists with the instrument.

I have a very low risk tolerance and to be perfectly honest with you all, I am not a very good trader. however my strength, in my opinion at least, lies in risk management and system design. I have been through many trading phases in my life looking at various systems including working with a programmer on a host of EA’s, but inevitably find that conditions in the market change thereby rendering these different approaches to the dustbin. meaning that these approaches failed the robustness test in that a truly robust system needs to weather all market conditions.

Given that in the next few years I will be returning to full-time trading for a living my focus has been on the development of sustainable trading systems that focus on capital preservation and income yield. and here we are today.

To be clear, I have not commenced trading this strategy as I lack sufficient available capital at the moment to commit my livelihood towards this venture. Furthermore, despite the relatively low trade frequency, this strategy is for a team that are prepared to operate 24/5 in shifts. I have time on my side to get this all cracking if this strategy stands up to intensive scrutinisation.

What I have done however over the past year or so is extensively backtest and forward test it over the past 688 calendar days commencing 1 January 2020.

Some guidelines for the Strategy:

  1. Obviously different trading strategies suit different personalities. This strategy may appeal to those seeking a trend trading strategy backed up with a solid risk management approach.
  2. I use IG Markets as my preferred platform as opposed to MT4 due to the excellent advanced charting package provided that assists in managing a diversified portfolio, plus the vast array of products which IG offers that can be traded from currency pairs to indices and commodities. The strategy is currently configured to actively monitor 24 products and a user friendly charting interface with comprehensive trading alerts is essential. It works well on MT4 but can become a pain in the neck when speed of execution is required. but of course it is your choice. I just thought I would mention what I use.
  3. I have not been successful developing an EA for this strategy as the determination of the trend is not timeframe dependant which makes programming difficult. Significant decision making needs to be made at D1, W1 and M1 levels Maybe there is a talented individual out there that might want to see if they can convert this into an EA. My feeling is that this approach will only ever be semi-automated at best given the discretionary nature of trend determination with the mechanistic nature of trade management.
  4. Despite my lack of success in developing an EA for this, I have removed human discretion at H1 TF where possible.
  5. An initial stop is always placed on each trade but immediately following stop execution, the standard deviation channel becomes your exit mechanism so you rarely hit your initial stop. As a result, time in trend is your friend as each bar of progression reduces your loss factor. The standard deviation channel is used to manage the trade at all times.
  6. My maximum risk tolerance is 0.5% risk per trade but this does not stop others from magnifying this amount if they are prepared to strike for a higher return. For example, a 1.0% risk per trade doubles returns but also expect an associated doubling of associated risk parameters such as the drawdown. I actually feel that this approach could handle a bit of aggressive risk management so based on current results, a 1.00% risk per trade would be regarded as perfectly acceptable as it is unlikely to keep you awake with cold sweats.
  7. For the DTT I use a daily chart to determine if a trend is in place with a standard deviation channel (1.0 std dev’s) to confirm the trend and it’s significance, and then I go to the H1 timeframe to redraw the trend from the D1 commencement point again using a standard deviation channel of 1.0 std dev’s, and then wait for a Donchian breakout, or jump in immediately if it has just occurred using a 40 period Donchian on the H1. I know I don’t spend much time discussing support and resistance levels which is a key requirement for trend trading, but this is where the Donchian comes into play by visually confirming that at least in the short term, following a breach, you will be trading in blue sky. Identification of support and resistance is a key step in your analysis on the D1 timeframe in identifying entry points and periods of congestion, but I don’t think I need to go into this much in this thread as there are many other threads that do a better job of this.
  8. Upon (or just before) breakout of the Donchian on H1 timeframe, immediately redraw the standard deviation channel from the commencement of the trend (on D1) to the bar immediately preceding the entry bar. The lower or upper standard deviation channel (dependant on trend direction) determines your initial stop distance = R.
  9. If I achieve 2.5R profit I redraw the trend on the H1 timeframe using a standard deviation channel of 0.5 standard deviations to further confine the trend boundaries and ensure not too much profit is taken off the table before an exit.
  10. Note that this strategy does not pick the highs and lows of a trend and tends to execute when the trend is well established and never achieves maximum profit potential.
  11. Using these rules you will ensure you are always in the direction of the daily trend.
  12. Note that I do not use price action signals such as pin bars, engulfing patterns etc. I simply use the Donchian breakout on H1 to keep things simple for me. This is necessary as I watch a large portfolio and cannot afford to be too detailed in my trend assessment.
  13. Also as I am not using traditional price action patterns I therefore use a bar chart as opposed to candlestick charts to keep things clean, decision making fast and avoid letting my brain override the technique.
  14. Note that I use the standard deviation channel to define a trend and do not use the classic trend definition methodology of a sequence of highs or lows. The reason for this is that a standard deviation channel is defined using the entire data set as opposed to say 3 or more points in a trend. The basis of this methodology is that I am looking for consistent trend patterns across the entire timeframe I am using. This helps me to validate those trends moves of more regular nature as opposed to those trend moves that may be biased by a few bars in the set. Furthermore the use of the standard deviation channel removes human discretion that is often present in drawing trends. For example, give the same chart to different people and they frequently draw different trend lines. This is avoided through the standard deviation channel method provided you draw the channels from the lowest point in the trend to the highest point in the trend. Another reason the the std dev channel is that I use it as a linear regression tool to define the slope of the trend.
  15. When in a trade, always redraw your standard deviation channel when a new high is made (for a long) or a new low is made (for a short). It is essential that when new data is added, the standard deviation channel is redrawn as this manages risk on your trade as it progresses.
  16. Note that use of the standard deviation channel effectively acts as a trend volatility measure like an ATR. For example volatility prior to entry will result in a wide std dev channel prior to entry. As a result your R will be wide reducing your position size for your level of risk tolerance.
  17. Losses are a fact of life so expect them. Fortunately this strategy strictly manages those losses and through diversification attempts to reduce drawdowns, so let the strategy take care of them. do not attempt to second guess. Just keep in your mind that you only trade strong trends on a longer term timeframe so momentum from fundamental factors are most likely driving these movements as opposed to random market behaviour. We never predict the future and simply jump on board the current daily trend. until of course it bends.

If this approach sounds interesting to you then I welcome you to this thread. As with standard warnings on other threads, this is for interested members only, who wish to learn or positively contribute.

I am not going to post backtest results (ok I lied. refer to Post 13) as it is a pointless exercise given no live trading has occurred. This will be a task for those who wish to trade this strategy themselves. Despite this however, from my own testing results, I could not be happier and I think those who get involved will also come to this conclusion.

What I can tell you however is this. Over the last 688 calendar days, there have been only 450 trade opportunities across the portfolio which gives you an idea that the strategy is fairly selective in its entries namely due to the condition that a good quality daily trend needs to be in place before a trade entry is signalled. For those who lack the patience to wait for these opportunities, this strategy may not be for you.

If you are happy with all this then I will shortly start posting a few charts to get things cracking.

Note to Readers
During the course of this thread the approach has been dynamically adjusting to respond to market conditions and strategy additions have been made to supercharge performance results. This approach described above which I refer to as the Diversified Trend Trading Approach DTT represents the core module to this technique and it is a necessary pre-requisite to fully understand this approach prior to moving onto supercharging trend trading additions which can be found later in the thread.

  1. Posts 1 to 230 relate to the basic DDT approach;
  2. Posts 231 onwards relate to a supercharged variant called the Enhanced Diversified Trend Trading approach of EDTT. Comprehensive details regarding the EDTT are found on post 231.
  3. Pay particular attention to post 360 onwards relating to a methodological recap of the EDTTI. RedLineFred has kindly compiled this recap into a pdf for easy reference.

Unfortunately to understand this approach in its entirety, you need to do a bit of reading for Posts 1 to 230 are still compuslory for understanding and get’s you a beginers certificate before you can advance to supercharged variants. This thread is not a free ride for a trader and demands a bit of effort on the readers part if they wish to participate or trade this approach. There are many nuances that must be understood before committing your hard earned dollars to this technique. I wish you all well, but please do your homework first.

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Let’s consider the following statement. If it’s true that the market can only go up or down over the long-term, then using the most basic 1:1 risk/reward ratio, there should be at least 50% winners, shouldn’t there? Well, there isn’t. This article debates in favour of the notion that a trader is their own worst enemy, and that human error is at the root of most problems. In short, the main reason why Forex traders lose money is no rocket science. It’s the traders themselves.

Financial trading, including the currency markets, requires long and detailed planning on multiple levels. Trading cannot commence without a trader’s understanding of the market basics, and an ongoing analysis of the ever changing market environment. For those interested in investing and trading, read through the suggestions below and you will learn how to avoid losing money in Forex trading.

Overtrading

Overtrading – either trading too big or too often – is the most common reason why Forex traders fail. Overtrading might be caused by unrealistically high profit goals, market addiction, or insufficient capitalisation. We will skip unrealistic expectations for now, as that concept will be covered later in the article.

Insufficient capitalisation

Most traders know that it takes money to make a return on their investment. One of Forex’s biggest advantages is the availability of highly leveraged accounts. This means that traders with limited starting capital can still achieve substantial profits (or indeed losses) by speculating on the price of financial assets.

Whether a substantial investment base is achieved through the means of high leverage or high initial investment is practically irrelevant, provided that a solid risk management strategy is in place. The key here is to ensure that the investment base is sufficient. Having a sufficient amount of money in a trading account improves a trader’s chances of long-term profitability significantly – and also lowers the psychological pressure that comes with trading.

As a result, traders risk smaller portions of the total investment per trade, while still accumulating reasonable profits. So, how much capital is enough? Here it is important to learn how to stop losing money in Forex trading due to improper account management. The minimum Forex trading volume any broker can offer is 0.01 lot.

This is also known as a micro lot and is equivalent to 1,000 units of the base currency that is being traded. Of course, a small trade size is not the only way to limit your risk. Beginners and experienced traders alike need to think carefully about the placement of stop-losses. As a general rule of thumb, beginner traders should risk no more than 1% of their capital per trade. For novice traders, trading with more capital than this increases the chances of making substantial losses.

Carefully balancing leverage whilst trading lower volumes is a good way to ensure that an account has enough capital for the long-term. For example, to place one micro lot trade for the USD/EUR currency pair, risking no more than 1% of total capital, would only require a $250 investment on an account with 1:400 leverage. However, trading with higher leverage also increases the amount of capital that can be lost within a trade. In this example, overtrading an account with 1:400 leverage by one micro lot quadruples potential losses, compared to the same trade being placed on an account with 1:100 leverage.

Trading Addiction

Trading addiction is another reason why Forex traders tend to lose money. They do something institutional traders never do: chase the price. Forex trading can bring a lot of excitement. With short-term trading intervals, and volatile currency pairs, the market can be fast paced and cause an influx of adrenaline. It can also cause a huge amount of stress if the market moves in an unanticipated direction.

To avoid this scenario, traders need to enter the markets with a clear exit strategy if things aren’t going their way. Chasing the price – which is effectively opening and closing trades with no plan – is the opposite of this approach, and can be more accurately described as gambling, rather than trading. Unlike what some traders would like to believe, they have no control or influence over the market at all. On certain occasions, there will be limits to how much can be drawn from the market.

When these situations arise, smart traders will recognise that some moves are not worth taking, and that the risks associated with a particular trade are too high. This is the time to exit trading for the day and keep the account balance intact. The market will still be here tomorrow, and new trading opportunities may arise.

The sooner a trader starts seeing patience as a strength rather than a weakness, the closer they are to realising a higher percentage of winning trades. As paradoxical as it may seem, refusing to enter the market can sometimes be the best way to be profitable as a Forex trader.

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Not Adapting to the Market Conditions

Assuming that one proven trading strategy is going to be enough to produce endless winning trades is another reason why Forex traders lose money. Markets are not static. If they were, trading them would have been impossible. Because the markets are ever-changing, a trader has to develop an ability to track down these changes and adapt to any situation that may occur.

The good news is that these market changes present not only new risks, but also new trading opportunities. A skilful trader values changes, instead of fearing them. Among other things, a trader needs to familiarise themselves with tracking average volatility following financial news releases, and being able to distinguish a trending market from a ranging market.

Market volatility can have a major impact on trading performance. Traders should know that market volatility can spread across hours, days, months, and even years. Many trading strategies can be considered volatility dependent, with many producing less effective results in periods of unpredictability. So a trader must always make sure that the strategy they use is consistent with the volatility that exists in the present market conditions.

Financial news releases are also important to keep track of, even if a selected strategy is not based on fundamentals. Monetary policy decisions, such as a change in interest rates, or even surprising economic data concerning unemployment or consumer confidence can shift market sentiment within the trading community.

As the market reacts to these events, there’s an inevitable impact on supply and demand for respective currencies. Lastly, the inability to distinguish trending markets from ranging markets, often results in traders applying the wrong trading tools at the wrong time.

Poor Risk Management

Improper risk management is a major reason why Forex traders tend to lose money quickly. It’s not by chance that trading platforms are equipped with automatic take-profit and stop-loss mechanisms. Mastering them will significantly improve a trader’s chances for success. Traders not only need to know that these mechanisms exist, but also how to implement them properly in accordance with the market volatility levels predicted for the period, and for the duration of a trade.

Keep in mind that a ‘stop-loss to low’ could liquidate what could have otherwise been a profitable position. At the same time, a ‘take-profit to high’ might not be reached due to a lack of volatility. Paying attention to risk/reward ratios is also an important part of good risk management.

What is the Risk Return Ratio?

The Risk/Reward Ratio (or Risk Return Ratio/ RR) is simply a set measurement to help traders plan how much profit will be made should a trade progress as anticipated, or how much will be lost in case it doesn’t. Consider this example. If your ‘take-profit’ is set at 100 pips and your stop-loss is at 50 pips, the risk/reward ratio is 2:1. This also means that you will break-even at least every one out of three trades, providing that they are profitable. Traders should always check these two variables in tandem to ensure they fit with profit goals.

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Not Having or Not Following a Trading Plan

How else do Forex traders lose money? Well, a poor attitude and a failure to prepare for current market conditions certainly plays a part. It’s highly recommended to treat financial trading as a form of business, simply because it is. Any serious business project needs a business plan. Similarly, a serious trader needs to invest time and effort into developing a thorough trading strategy. As a bare minimum, a trading plan needs to consider optimum entry and exit points for trades, risk/reward ratios, along with money management rules.

Unrealistic Expectations

There are two kinds of traders that come to the Forex market. The first are renegades from the stock market and other financial markets. They move to Forex in search of better trading conditions, or just to diversify their investments. The second are first-time retail traders that have never traded in any financial markets before. Quite understandably, the first group tends to experience far more success in Forex trading because of their past experiences.

They know the answers to the questions posed by novices, such as ‘why do Forex traders fail?’ and ‘why do all traders fail?’. Experienced traders usually have realistic expectations when it comes to profits. This mindset means that they refrain from chasing the price and bending the trading rules of their particular strategy – both of which are rarely advantageous. Having realistic expectations also relieves some of the psychological pressure that comes with trading. Some inexperienced traders can get lost in their emotions during a losing trade, which leads to a spiral of poor decisions.

It’s important for first-time traders to remember that Forex is not a means to get rich quickly. As with any business or professional career, there will be good periods, and there will be bad periods, along with risk and loss. By minimising the market exposure per trade, a trader can have peace of mind that one losing trade should not compromise their overall performance over the long-term.

Make sure to understand that patience and consistency are your best allies. Traders don’t need to make a small fortune with one or two big trades. This simply reinforces bad trading habits, and can lead to substantial losses over time. Achieving positive compound results with smaller trades over many months and years is the best option.

In Summary

There we have it, the main reasons why Forex traders fail and lose money, along with the steps traders need to take in order to prevent them from occurring. Studying hard, researching and adapting to the markets, preparing thorough trading plans, and, ultimately, managing capital correctly can lead to profitability. Follow these steps and your chances for consistent success in trading will improve dramatically!

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

How to Trade Forex News: An Introduction

Major economic data has the potential to drastically move the forex market. It is this very movement, or volatility, that most newer traders seek when learning how to trade forex news. This article covers the major news releases , w hen they occur , and presents the various ways traders can trade the news.

Why Trade the News on Forex?

Traders are drawn to forex news trading for different reasons but the biggest reason is volatility. Simply put, forex traders are drawn to news releases for their ability to move forex markets. ‘News’ refers to economic data releases such as GDP and inflation, and forex traders tend to monitor such releases considered to be of ‘high importance’ .

The largest moves tend to follow a ‘surprise’ in the data – where the actual data contrasts what was expected by the market – the good news here is that you don’t have to hold a PhD in Economics because our economic calendar already provides economist expectations .

Furthermore, news releases are set at pre-determined dates and times allowing traders enough time to prepare a solid strategy.

Traders that can effectively manage the risks of volatility, at the predetermined time of the news release, are well on their way to becoming consistent traders.

The Impact of Major News Releases on the Forex market

Just before a major news release, it is common to witness lower trading volumes, lower liquidity and higher spreads, often resulting in big jumps in price . This is because large liquidity providers, much like retail traders, do not know the outcome of news events prior to their release and look to offset some of this risk by widening spreads.

While large price movements can make trading major news releases exciting, it can also be risky. Due to the lack of liquidity , traders could experience erratic pricing. Such erratic pricing has the potential to cause a huge spike in price that shoots through a stop loss in the blink of an eye, resulting in slippage .

Additionally, the wider spread could place traders on margin call if there isn’t enough free margin to accommodate this . These realities surrounding major news releases could result in a short trading career if not managed properly through prudent money management such as incorporating stop losses or guaranteed stop losses (where available).

In general, major currency pairs will have lower spreads than the less traded emerging market currencies and minor currency pairs. Therefore, traders may look to trade the majors EUR/USD , USD/JPY , GBP/USD , AUD/USD and USD/CAD to mention a few.

Traders need to be well prepared ahead of time – with a clear idea of what events they want to trade and when they occur. It’s also important to have a solid trading plan i n place.

“Don’t think about what the market’s going to do; you have absolutely no control over that. Think about what you’re going to do if it gets there. In particular, you should spend no time at all thinking about those rosy scenarios in which the market goes your way, since in those situations, there’s nothing more for you to do. Focus instead on those things you want least to happen and on what your response will be.” – William Eckhardt

Which Major Forex News Releases to Trade?

When learning how to trade news, traders must be aware of the major news events that affect the forex market, that can be monitored closely using an economic calendar .

US economic data is so influential within global currency markets that it is generally seen as the most important news. It is important to note that not all news releases lead to increased volatility. Rather, there are a limited number of major news releases that have previously produced the greatest potential to move the market.

The table below summarizes the major US economic releases alongside some of the most important non-US data releases from around the world .

M ajor news releases (US and rest of world) :

Economic data release

8:30am – monthly release (first Friday after the month ends)

Represents the net changes in employment jobs

8:30am – quarterly release

Gauges the monetary value of all goods and services produced within the US over a specified period

1:00pm – scheduled 8 times a year

Interest rate at which depository institutions lend and borrow to other institutions, overnight

Australian cash rate

10:30pm (First Tuesday of the month except January)

Interest rate charged on overnight loans between financial intermediaries

Australian employment change

7:30pm – monthly release (about 15 days after month ends)

Change in number of employed people during the previous month

7:45am – 8 times a year

Interest rate on the main refinancing operations offering liquidity to the financial system

Bank of England official bank rate

7:00am – monthly release

Interest rate that the BOE lends to financial institutions (overnight)

Bank of Canada overnight rate

10:00am – 8 times a year

Overnight rate that major financial institutions borrow and lend between themselves

Canadian employment change

8:30am – monthly (about 8 days after month ends)

Measures the change in the number of employed people in the previous month

Reserve Bank of New Zealand official cash rate

9.00pm – scheduled 7 times a year

Interest rate at which banks borrow and lend to other banks, overnight

Key Tools & Resources to Trade Forex News

DailyFX provides a one-stop-shop for all your forex related data and news releases:

  • Economic calendar : Know when major data like the US Non-Farm-Payroll, GDP, ISM, PPI and CPI figures are due to be released.
  • Central Bank Calendar : Central Bank interest rate decisions can have profound effect on the financial markets. Get to know when they are scheduled.
  • Real time news feed : Stay up to date with breaking news, as it happens, with updates from our top analysts. Similarly, get all the major stories of the day plus analysis by following our market news.

Managing risk when trading news and events

The importance of prudent risk management c annot be overstated during volatile periods that follow a news release.

The use of stops is highly recommended but in this case, traders may want to consider using guaranteed stops (where available) over normal stop s , which are susceptible to slippage . Guaranteed stops do come with a fee so be sure to check this with your broker; however, this fee can oftentimes end up being insignificant in relation to the amount of slippage that can occur in such volatile periods.

Additionally, traders should also look to reduce their normal trade size . Volatile markets can be a trader’s best friend but also have the potential to reduce account equity significantly if left unmanaged. Therefore, in addition to placing guaranteed stops, traders can look to reduce their trade sizes to manage the emotions of trading .

3 Approaches to forex news trading

There are a number of approaches traders can adopt when developing a forex news trading strategy which depend on the timing of the trade relative to the news release.

Many traders like to trade in the moment and make decisions as and when an announcement happens – using an economic calendar to plan ahead. Others prefer to enter the market in less volatile conditions ahead of a release or announcement. To summarize, forex news trading fits into one of the categories below:

1. Trading before the news release

Trading forex news before the release is beneficial for traders looking to enter the market under less volatile conditions. In general, traders who are more risk averse gravitate towards this approach looking to capitalize on the quieter periods before the news release by trading ranges or simply trading with the trend . Discover strategies on how to trade before the news release .

2. Trading during a release

These forex news trading strategies are not for the faint hearted as it involves entering a trade as the news breaks or in the moments that immediately follow. This is at a time when the market is at its most volatile which underscores the importance of having a clear strategy and well-defined risk management. E quip yourself with strategies to navigate the volatility associate d with forex news trading at the release .

3. Trading after the news release

Trading post-release involves entering the trade after the market has had some time to digest the news. Often the market, through price action, provides clues on its future direction – presenting traders with great opportunity. Learn how t o trade the news when the market is in transition with our article on trading after the news release .

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